Canada’s securities regulators are paying attention to ICOs. Last week they released a guidance document that explains their approach to token sales/ICOs/ITOs/crowdsales, officially titled “CSA Staff Notice 46-307: Cryptocurrency Offerings.” Here is what this notice means and what it doesn’t mean.

In the press release that accompanied the Staff Notice, Louis Morisset, the chair of the Canadian Securities Administrators (CSA) and the head of the Quebec securities regulator, is quoted as saying: “The technology behind cryptocurrency offerings has the potential to generate new capital-raising opportunities for businesses and we welcome this type of innovation …” The press release recommends the Staff Notice to anyone “… planning to raise capital through an ICO or ITO, or that is seeking to establish a cryptocurrency investment fund.”

Before diving into what the Staff Notice says, it’s important to understand what a Staff Notice is. The author of the Staff Notice is the CSA, an association of provincial and territorial securities regulators. Regulation of securities is conducted on a provincial basis and is not done at a country-wide level like in most jurisdictions. The CSA is a national forum for harmonizing securities rules and this Staff Notice is essentially a joint position on how Canada’s many securities regulators view ICOs.

The Staff Notice is interesting but it is not a legal change. It does not create any new rules in Canada but it does provide some clarity for anyone seeking to understand how Canadian securities law applies to token sales.

Here are ten key takeaways from the CSA Staff Notice:

1. Regulators will treat each token using a case-by-case approach

A widespread fear in the blockchain industry is that regulators will somehow “shut down” token sales. The Staff Notice assuages that fear:

“Every ICO/ITO is unique and must be assessed on its own characteristics. For example, if an individual purchases coins/tokens that allow him/her to play video games on a platform, it is possible that securities may not be involved. However, if an individual purchases coins/tokens whose value is tied to the future profits or success of a business, these will likely be considered securities.”

This is a great paragraph to see. The regulators are communicating what any lawyer working in this area would have confirmed for a client: Some tokens are securities and some aren’t. This means that the regulators aren’t interested in a knee-jerk response that paints all token sales with the same broad brush.

2. Substance will trump form when it comes to ICOs

A security is not a security because of the words used but because of what it is. The Staff Notice includes a warning to this effect:

“Staff is aware of businesses marketing their coins/tokens as software products, taking the position that the coins/tokens are not subject to securities laws. However, in many cases, when the totality of the offering or arrangement is considered, the coins/tokens should properly be considered securities. In assessing whether or not securities laws apply, we will consider substance over form.”

An illegal securities offering can’t be dressed up to make it a legal product. A high-level staffer in the Ontario Securities Commission was quoted in the Globe and Mail on the same day that the Staff Notice was issued: “So what we’re trying to do is raise awareness that just because you’ve called something a coin or token doesn’t mean it’s now a loophole and you can go and promise your investors great returns, not provide any sort of documentation and not ensure what you’re selling to them is actually suitable for them.”

3. The CSA thinks many ICOs are securities offerings aimed at retail investors

Products are purchased. Capital is invested. When a store sells a good, they don’t consider that sale to be “investment.” Yet the world of ICOs is filled with references to token investors rather than token buyers. Many people speak of “raising capital” when they sell a token, while resisting the characterization of that transaction as the sale of securities. As the Staff Notice points out:

“ICOs/ITOs are generally used by start-up businesses to raise capital from investors through the internet. These investors are often retail investors.”

Many ICOs are being done in order to “raise capital,” rather than to create revenue through the sale of products, and the securities regulators have taken notice. The reference to “retail investors” acknowledges that most of the activity is taking place at the individual level rather than through institutional, large corporate or fund investments. This paragraph indicates that the CSA may view most ICOs/ITOs as securities offerings.

4. The existing legal framework for securities will be applied: Pacific Coin

“1. An investment of money 2. In a common enterprise 3. With the expectation of profit 4. To come significantly from the efforts of others.”

This test is similar to the Howey test in the United States. Note that this isn’t a “test” in the way that most people would understand that word. A legal test is a framework for decision-making that requires understanding the facts, circumstances and recent cases. Consultation with a lawyer will be necessary in order to understand how this test applies to any given situation — and even then it may not be clear.

Essentially, this section of the Staff Notice shows that they’re not planning a unique approach to ICOs. Token sales will be integrated into the existing legal rules for securities.

If a token is a security, that doesn’t necessarily mean that it can’t be sold. It does mean that if it’s sold there will be many rules to follow. The CSA helpfully explains the system in Canada for selling token-securities at a high-level:

“To date, no business has used a prospectus to complete an ICO/ITO in Canada. We anticipate that businesses looking to sell coins/tokens may do so under prospectus exemptions. Sales may be made to investors who qualify as ‘accredited investors’ as defined under securities laws, in reliance on the accredited investor prospectus exemption. For retail investors who do not qualify as accredited investors, sales will typically need to be made in reliance on the offering memorandum (OM) prospectus exemption.”

The above section is followed by a note that “white papers” are not sufficient disclosure to meet Canadian securities rules.

6. There are can be civil as well as regulatory consequences for non-compliance

What happens if Canadian securities rules aren’t followed? The CSA reminds people that beyond regulatory penalties there may be civil penalties:

“It should also be noted that investors may also have civil remedies against persons or companies that fail to comply with securities laws, including a right to withdraw from the transaction and/or damages for losses on the grounds that such transactions were conducted in breach of securities laws.”

The above warning applies to securities-related penalties/remedies. There may also be other civil causes of action generated by an improper sale. Canadian law has many opportunities for buyers to sue sellers for tricking them or not properly explaining what they were selling.

One of the explicit audiences for the Staff Notice is people running or considering running cryptocurrency investment funds. Pages 5-6 have excellent information on what the legal compliance steps are for properly running a crypto fund in Canada.

8. Some token sales are securities offerings, and some token-securities are also derivatives

Securities can also be derivatives and there may be additional rules that apply. The CSA notes that there might be two sets of rules to follow:

“We note that these products may also be derivatives and subject to the derivatives laws adopted by the Canadian securities regulatory authorities, including trade reporting rules.”

9. Resale restrictions need to be considered for tokens that are securities

There is a paragraph in the Staff Notice that could be easily overlooked but contains a very useful tip for anyone designing token systems:

“Allowing coins/tokens that are securities issued as part of an ICO/ITO to trade on these cryptocurrency exchanges may also place the business issuing the coins/tokens offside securities laws. For example, the resale of coins/tokens that are securities will be subject to restrictions on secondary trading.”

This paragraph is a challenge to lawyers who are working on ICOs that are or may be securities. They will have to consider how the rules that apply to securities will be enforced by the system being deployed. How will resale restrictions imposed by securities laws be reflected in the technical system? Will we end up with a new ERC standard for regulated tokens that don’t permit transfer? Or that locks the token for a period of time? A token that doesn’t include the legal rules in its technical rules could end up creating legal trouble for the proponents.

10. The regulatory focus has shifted from crypto investment risks to tokens as securities

In 2014, the securities regulators (specifically, the Ontario Securities Commission) viewed digital currencies through the lens of transactions and speculation:

“Virtual (or digital) currencies like Bitcoin are being used as a type of money and offer a novel way to make purchases and transact business online. However, it remains unclear what virtual currency truly represents. Is it actually money? An investment? Something else? This is still a largely uncharted and unsupervised area, and no protections are likely available to you if you become involved with virtual currency and something goes wrong.”

The Staff Notice is a shift in thinking, away from the “buyer beware” stance that they held before and a recognition that blockchain development is rapidly moving beyond payments and into many other areas of the economy.

This is a guest post by Addison Cameron-Huff, a Canadian blockchain technology lawyer. The views expressed are his own and do not necessarily reflect those of Bitcoin Magazine. This article is for informational purposes only and should not be construed as legal advice. As always, consult with a legal professional before undertaking any activities described.

BTC-USD is up 160% in the 6 weeks since it last bottomed out at around $1800. The $2850 growth marks the sixth week in a row of new highs and aggressive bull runs as bitcoin sits upon its current all-time high in the $4600s. One can’t help but wonder where the top of this run lies; Goldman Sachs is calling the top of the bull run at around $4800.

Historically, during times of war and political uncertainty, investors tend to seek financial safe havens in precious metals and other long-lasting, stable investment vehicles. Yesterday, North Korea made an aggressive move toward Japan by launching a missile over Japanese airspace. Within hours of the news hitting the public, Bitcoin saw massive price growth, thus establishing, once again, a new all-time high:

After an entire week of decreasing volume, BTC-USD saw a spike in buy volume once the news of North Korea’s aggression hit the public. This is one of several bullish moves in the recent series of news events following North Korean aggression. As of the time of this article, Japan has yet to formally respond to this act of aggression, and one can speculate that bitcoin will likely continue to see price growth as the political uncertainty continues to grow.

On the macro scale, Bitcoin is showing signs of bullish exhaustion despite the push to greater highs:

Although there is a good argument for Bitcoin price growth on just fundamental analysis of the North Korean situation alone, it’s important to remain objective in our analysis. There are three signs of bullish exhaustion in the macro trend of this BTC-USD market.

Although Bitcoin is making new price highs, on the 1-day candle trend the RSI is failing to make a new high (shown in yellow) — this activity is called “divergence” and shows a decrease in bullish momentum. Additionally, although the 6-hour volume made a significant impact on the market, the 1-day volume is currently failing to make any significant impact on the overall trend (shown in blue).

Lastly and most significantly, the 1-day Bollinger Bands (shown in pink) have begun to go completely horizontal and are now beginning to actually curve downward.

The current Bollinger Band trend accompanied by the bullish momentum loss is pushing BTC-USD into a potential reversal pattern known as “Three Pushes to a High.” Basic characteristics of this pattern are:

Narrowing Bollinger Bands upon the advance of each high;

Momentum loss on various indicators;

Continued divergence across all three highs.

Currently, the “Three Pushes to a High” reversal has yet to be confirmed and is certainly not in a tradable condition, but it is something that every Bitcoin trader should consider on the macro trend of this market.

Since the run from $1800, well established Fibonacci Retracement lines have revealed themselves on the market:

Figure 3: BTC-USD, 6 Hour Candles, Bitfinex, Macro Support Lines

There is very strong support on the 23% line, as the market consolidated for about a week at those values. If our current price level proves to be the top of this run, a possible retracement might occur. Should a retracement occur, Figure 3 will be an important reference in order to see, on a macro scale, where the support levels lie and where potential market entry and exits will exist.

Summary:

Technical indicators show the market is possibly approaching its top on the macro-trend;

Support lines exist on the Fibonacci Retracement values shown in Figure 3.

Trading and investing in digital assets like bitcoin, bitcoin cash and ether is highly speculative and comes with many risks. This analysis is for informational purposes and should not be considered investment advice. Statements and financial information on Bitcoin Magazine and BTC Media related sites do not necessarily reflect the opinion of BTC Media and should not be construed as an endorsement or recommendation to buy, sell or hold. Past performance is not necessarily indicative of future results.

Mobile messaging app Kik has raised $50 million from the private sale of its ethereum token Kin to institutional investors, including Blockchain Capital, Pantera Capital and Polychain Capital. The announcement is notable as Kik's Kin token may well be the first mainstream adoption of a custom cryptocurrency by a well-known company – Kik claims 15 million active users, about […]

The Blockchain in Trucking Alliance (BiTA) announced its launch on August 16, 2017. According to the alliance, their goal is to utilize blockchain tech in the trucking industry — an industry that “has a reputation of being behind the curve on technology.”

“We formed the Blockchain in Trucking Alliance to develop common standards around blockchain applications in the trucking industry, from speeding up transactions to securing data transfers. The technology holds great promise, but to encourage its proliferation, we believe that developing industry standards were paramount. PS Logistics brings a depth of industry experience and full-service logistics knowledge to help our industry innovate with integrity through this new technology,” Craig Fuller, CEO of TransRisk and co-founder of BiTA, said in a statement.

By implementing blockchain technology, BiTA seeks to use triple-entry accounting, which the organization believes would solve some of the industry’s most pressing concerns. Some of the improvements would include immediate payment of drivers upon delivery; transparent and verifiable maintenance records; immediate and self-executing payments for things like fuel and parts; more efficient and fair processes for disputes and arbitrage over freight quality and claims; and immutable carrier history and safety records.

“Blockchain [technology] by its nature is distributed and owned by no single person. It is open source and requires collaboration and standards,” said Fuller. “We are helping to launch BiTA as a way to initiate dialogue between parties in the trucking ecosystem.”

According to the organization, the main difficulty they are currently facing is the integration of blockchain tech into the trucking industry. BiTA encourages the recording of physical transactions (i.e., a load being delivered) in a digital format. The organization believes the evolution of blockchain technology will bridge the gap between “analog and physical transactions to digital transactions and the blockchain.”

The members of BiTA are currently discussing the options and methods of blockchain technology’s implementation.

“We have relationships with many of the Alliance members that are not related to blockchain [technology], but the conversation around blockchain keeps coming up and many of them are exploring blockchain [tech],” said Fuller, “but most are concerned about making significant investments because of the lack of standards and commercial adoption.”

BiTA said, “We are engaging the brightest minds from the most influential leaders in transportation, finance, and technology. BiTA will build the first set of transportation industry–specific blockchain standards and promote the most transformative technology since the internet.”

BiTA has since announced the addition of PS Logistics as their newest member. According to BiTA, PS Logistics, as a charter member along with TransRisk, Triumph Business Capital and McLeod Software, will employ the use of smart technology and uniform performance standards in order to advance the transportation industry. The organization is currently listed as a logistics charter member along with the U.S. Xpress Inc. and Convoy.

Bitcoin Cash (Bcash or BCH) has been more profitable to mine than Bitcoin (BTC) on multiple occasions over the past week or two. This is creating a new dynamic within Bitcoin’s ecosystem — one which is not really beneficial for either coin.

In Bitcoin Magazine's previous article on this topic, we explained why Bcash mining should normally not affect Bitcoin too much, aside from the incidental higher fees and slower confirmations. We also explained why this dynamic could, in the meantime, ruin Bcash, as it should freeze that blockchain in its tracks.

We also noted that Bcash has a built-in emergency solution to mitigate the risk, which could get its blockchain moving again. But this solution does assume either that some miners are choosing to act against their own short-term interest at certain times for the benefit of all miners — or that miners are coordinating for their mutual benefit, on some level.

Now, several days later, it appears that this is what’s happening. Some miners are either acting against their short-term interests for specific periods of time — or they are coordinating to trigger the emergency solution.

The good news for Bcash is that this means its blockchain is still in motion for now, at least on most days. But at the same time, the dynamic set in motion by the emergency solution is benefiting its miners overall, more than anyone else — and it’s even calling into question the long-term viability of Bitcoin Cash itself.

The Emergency Difficulty Adjustment

Mining profitability is determined by the value of the block reward (newly mined coins plus transaction fees) and the “difficulty” to mine a block. If the value of the block rewards are higher and the difficulty is lower, miners make more money.

The difficulty on both Bitcoin and Bcash self-adjusts each time 2016 blocks are mined. If it takes longer than two weeks to mine these 2016 blocks, difficulty adjusts downward so it becomes easier to mine. If it takes less than two weeks, the difficulty adjusts upward so it becomes harder.

Bcash really needs its difficulty to be low enough to match the value of its block rewards in relation to Bitcoin. So, if Bcash's block reward is worth 15 percent of Bitcoin’s block reward, Bcash’s difficulty must also be 15 percent of Bitcoin’s difficulty, or lower. Otherwise, Bitcoin will be more profitable to mine, and miners will really have no reason ever to return to Bcash, leaving the Bcash blockchain frozen in its tracks.

The big problem is that, as long as Bcash’s block rewards do not exceed Bitcoin’s block rewards, this is bound to happen sooner or later. At some point, Bcash difficulty will exceed what its block reward will be worth, at which point all miners should leave.

To mitigate this problem, Bcash implemented a feature called the “emergency difficulty adjustment” (EDA). If in a space of at least twelve hours, fewer than six blocks are mined, the difficulty adjusts downwards by 20 percent for the next block. If miners coordinate or time this well, this can bring difficulty down by about 75 percent within a day.

The Problems

While triggering the EDA is preferable over a blockchain frozen in its tracks forever, it does present new problems.

Once difficulty is low enough, profit-maximizing miners are incentivized to jump on Bcash mining, producing an enormous number of blocks before difficulty adjusts within a day or two. Then, once the difficulty adjusts upward by a lot, and all these miners will switch back to Bitcoin — until some miners trigger Bcash’s EDA again, potentially after 12 hours or so, and all miners hop back on Bcash, creating a sort of stop-and-go cycle, on repeat.

In our previous article, we noted that this stop-and-go cycle is not ideal for users. But we didn’t go into specifics about what problems those would be, exactly. And there are a number of them…

First of all, this stop-and-go cycle actually causes a disturbance for Bitcoin users as well. Each time miners hop on Bcash, hash power leaves the Bitcoin network, which means that Bitcoin blocks are mined more slowly. As a result, Bitcoin’s transaction fees and confirmation times go up. And the fact that miners are intentionally gaming the system like this, suggests that the situation could drag on for a while: potentially weeks or months, and maybe even longer depending on how Bcash develops.

Meanwhile, this cycle makes Bitcoin Cash confirmation times very unreliable. On some days, transactions confirm very quickly, as blocks are found about every minute. On other days, there are (almost) no new blocks at all for at least 12 hours, and transactions take incredibly long to confirm, by comparison.

Arguably, an even bigger problem is that because of this dynamic, Bcash mining rewards — new coins — enter the system much more quickly: currently about four times faster than they are supposed to. As a result, Bcash’s inflation rate is relatively high. While Bitcoin’s current yearly inflation rate sits at about 4 percent, Bcash’s yearly inflation rate is on pace to be closer to 16 percent. This favors miners who earn these coins — at the cost of coin-holders.

What’s more, because of this same dynamic, Bcash’s next block halving will arrive much faster as well, possibly around mid 2018 instead of mid 2020. And if nothing changes, there could even be another halving by early 2019: the block reward could fall to 3.125 BCH in just a little over a year from now.

These halvings is where Bcash’s real problems could begin.

As perhaps its central value proposition compared to Bitcoin, Bcash wants to keep its transaction fees extremely low; even as low as zero. Therefore, it is not clear that fees will make up for the loss in rewards; it seems especially unlikely that these losses will be made up within a year, if ever. So unless the market price of BCH, compared to BTC, increases by a lot, and fast, the value of Bcash’s block reward could dwindle significantly.

Now, keep in mind that for miners to mine Bcash at all, its difficulty must be even lower than its block reward, compared to Bitcoin, and that if that is the case, all profit-maximizing miners are expected to pile on.

That means that all these miners will be able to mine the 2016 blocks even faster when they do all pile on Bcash. Instead of two days, it could take them even one day. Or less. Which would, of course, mean that the next block halving will be reached even faster. This would in turn means that the block rewards would be even less valuable, difficulty would needs to be even lower for miners to hop on, and miners would be able to mine the 2016 blocks even faster next time. Maybe even in half a day.

Bcash’s EDA could lead to vicious downward spiral, which would significantly decrease Bcash’s security against 51% attacks. It would also make it easier for miners hostile to Bcash to frustrate the system in other ways; for example, they could prevent emergency adjustments from kicking in. Moreover, Bcash could reach the point where its block rewards aren’t even worth the time and effort for miners to switch between chains, and Bcash freezes in its tracks, after all.

Bitcoin Cash will need to fix this problem somehow, and by now developers are indeed discussing the issue. Either that, or the coin must become more valuable than Bitcoin to mitigate the problem altogether — fast.